Texas Series LLC
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Texas Series LLC Overview
A Texas Series LLC is a traditional LLC that has adopted special language within the governing documents to authorize the use of "series" or cells. A Series LLC can have multiple series within a one LLC framework. As such, it is often used as an alternative to a multiple LLC structure. Here's why: Each series (envision multiple cells within the one Series LLC) can insulate assets from the liabilities associated with the other series/cells similar to how a separate LLC would insulate its assets from the liabilities of other LLCs.
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A Series LLC is essentially a slight variation of the traditional LLC. The primary difference between the two is that the Series LLC incorporates special language into the Certificate of Formation and the Company Agreement that unlocks the ability to create an unlimited number of "series" or cells within the framework of a single LLC. Each series or cell has the characteristics of an independent LLC under the umbrella of the parent/master LLC (aka Series LLC).
The term "Series LLC" is the correct terminology for the actual parent/master LLC; and the term "series" is the proper way to describe each unit or cell within the Series LLC.
The Texas Series LLC provides a means of insulating the assets of one series from the liabilities and obligations of the LLC and the other series which is a significant advantage over a traditional LLC (where all assets would be available to satisfy the liabilities and obligations of the LLC). The Texas Series LLC is ideal for real estate investors or other businesses that have multiple large assets or lines of business.
Cost: The primary benefit of a Series LLC lies in the cost. The Texas Secretary of State charges a $300 filing fee to form a traditional LLC, corporation or Series LLC. The Texas SOS does not, however, charge for each new series.
Please note that you must now file Assumed Name Certificates with the state. This will set you back about $25 per (sub)series.
Liability Protection: If operated properly the debts, liabilities, obligations, and expenses incurred with respect to a particular series are enforceable only against the assets of that series, and are not enforceable against the assets of the LLC generally or any other series and vice versa.
- where the tax and financial information of one series needs to be kept confidential from the members of another series.
- where some series will be engaged in for-profit activities while other series will be engaged in not-for-profit activities.
- where combined reporting for Texas franchise tax purposes will cause issues with allocating the franchise tax burden to each series.
- where the activities of one series create a substantially higher level of liability than the other series.
- where it will be difficult to keep clear records for each separate series, especially in connection with the ownership of assets (i.e. If each series is based out of the same office and the various assets are used by multiple series).
- where a series will need to borrow from an institutional lender.
The name of the (sub)series should include the word "series." The most common naming structures for a series are:
[Name of LLC] - [Name of Series] -OR-
[Name of Series], a series of [Name of LLC]
- ABC, LLC - Series 1
- ABC, LLC - 123 Main Series
- Superior Painting, a series of ABC, LLC
For more detailed information, you can read our full article on How to Name a Series.
- Filing Fees Minimized. The Series LLC structure will require only one $300 filing fee. Each (sub)series or cell, will only require an assumed name certificate (about $50 per (sub)series).
- Asset Protection. Assets of each series/cell are protected from judgments against the other series/cells.
- Reduced Admin. A series LLC with multiple series requires less upkeep that multiple LLCs.
- Only one state registration. Only the parent/Series LLC must be registered with the state, which means only 1 annual report.
- Relatively New Entity. The case law is currently developing which means there is some uncertainty on the fringes (i.e. what happens if you use a Texas Series LLC to do business in a state that has not yet enacted a Series LLC statute?)
- Relatively Complex. Banks, CPAs and insurance companies are still getting familiar with Series LLCs and what they can and should not do. Compared to a traditional LLC, a Series LLC is viewed as more complex.
- Accounting Issues. You'll need to keep great records if you want to utilize a Series LLC. The only way to maintain the liability shield between series is to keep great records.
Another issue that has not yet been resolved is whether each series must have a separate EIN. Each Series can get an EIN and must if it will have it's own bank account.
The IRS in a Proposed Regulation from 2010 has indicated that each sub-series should be treated a separate entity for federal income tax purposes. Because Texas law does not require separate bank accounts for the various sub-series, it is tempting not to get separate EINs if a sub-series does not need a bank account and will not have employees.
The IRS had this to say about classification of the Series LLC and each sub-series (as of the date of this article, this is a proposed regulation, not a final regulation:
The proposed regulations do not address the entity status or filing requirements of series organizations for Federal tax purposes. A series organization generally is an entity for local law purposes. An organization that is an entity for local law purposes generally is treated as an entity for Federal tax purposes. However, an organization characterized as an entity for Federal income tax purposes may not have an income or information tax filing obligation. For example, §301.6031(a)-(1)(a)(3)(i) provides that a partnership with no income, deductions, or credits for Federal income tax purposes for a taxable year is not required to file a partnership return for that year. Generally, filing fees of a series organization paid by series of the series organization would be treated as expenses of the series and not as expenses of the series organization. Thus, a series organization characterized as a partnership for Federal tax purposes that does not have income, deductions, or credits for a taxable year need not file a partnership return for the year.
In other words, under the proposed regulation above, each sub-series of a Series LLC will be treated as a separate entity for federal income tax purposes. As a result, each sub-series will be classified under the “check-the-box” regulations and may make any federal tax election it is otherwise eligible to make independently of any other sub-series. For example (barring any affirmative elections):
ABC, LLC has two sub-series; ABC, LLC - Series 1 is owned by 1 member; ABC, LLC - Series 2 is owned by 2 members;
ABC, LLC - Series 1 will be treated as a sole proprietorship or disregarded entity and the sole member will report the profits of ABC, LLC - Series 1 on his/her personal 1040.
ABC, LLC - Series 2 will be treated as a partnership and thus will need to file a partnership tax return.
Getting back to the original question...Does the Series LLC and each sub-series need an EIN? The answer seems rather simple: Determine the tax classification of the Series LLC or sub-series and then determine which of them will require an EIN (the answer is almost always "yes" an EIN is needed).
The Texas Business Organizations Code (TBOC) addresses LLC wind ups in two places: Chapter 101 (LLCs) and Chapter 11 (Termination of Domestic Entities).
A basic wind up for a traditional LLC would generally entail three steps: (1) a wind up event, (2) notice to creditors, if any; (3) the filing of a certificate of termination along with a certificate of account status.
Although a Series LLC is an actual filing entity, the various series (think sub-LLCs or cells) are not. As such, it appears that step 3 above would not apply to a series. Section 11.103 of the TBOC confirms this concept: "a nonfiling entity terminates on the completion of the winding up of its business and affairs. Notice of the termination must be provided by the nonfiling entity in the manner provided in the governing documents of the nonfiling entity if notice of termination is required under the governing documents."
While Chapter 11 of the TBOC addresses all domestic entities in general, sections 101.614 through 101.622 of the TBOC focus on the wind up procedures specifically related to a series. Here, we have focused on issues related specifically to a series of a Texas Series LLC.
Wind Up Procedures Specifically Related to a Texas Series
A series and its business and affairs may be wound up and terminated without causing the winding up of the limited liability company. The series terminates on the completion of the winding up of the business and affairs of the series. The LLC shall provide a wind up notice to known claimants in accordance with Section 11.052(a)(2) of the TBOC and in the manner provided in the company agreement, if applicable. The termination of the series does not affect the limitation on liabilities of the series.
Most Series Agreements will include a wind up process that tracks Chapter 11 of the TBOC. If the Series Agreement does not, you will want to look to the Company Agreement and then the TBOC for guidance.